New Law Benefits Lender Class Action Defendants

Class Action Fairness Act of 2005 opens up federal courts

June 27, 2005

By R. Scott Johnson
Franzen and Salzano PC

With its passage, corporate defendants and their attorneys will likely have greater opportunities to utilize the structure and uniformity of federal courts. One of the stated purposes of the Act is to allow easier access to federal courts for cases of national importance. The Act is not retroactive and only applies to class actions filed after February 18, 2005.

The three main areas related to class actions addressed by the Act are federal jurisdiction, removal procedures and consumer rights during class action settlements.

Federal Jurisdiction
The two main types of jurisdiction of federal courts are federal question jurisdiction and diversity jurisdiction. Federal question jurisdiction is exactly that-cases that involve claims that arise under federal law. Diversity jurisdiction involves claims between residents of different states with $75,000 or more at stake.

Prior to the passage of the Act, under diversity jurisdiction, complete diversity of the parties was required. That is, no defendant could be a resident of any state in which a plaintiff class representative was a resident. Under the Act, the complete diversity requirement and the $75,000 individual claim requirement have been removed for class actions. Federal courts now have jurisdiction over class actions that involve claims in a total amount of $5,000,000 or above and in which any plaintiff resides in a state different from that of any defendant. This type of “minimal diversity” greatly eases the entry of large state law class actions into federal court.

Under certain circumstances, a federal court may decline to exercise jurisdiction and under other circumstances it must decline jurisdiction. If between one-third and two-thirds of the plaintiff class members and the primary defendants are residents of the state in which the action was initially filed, the court may analyze certain factors to determine if it should exercise jurisdiction. If greater than two-thirds of the plaintiff class members and the primary defendants are residents of the state in which the action was originally filed, the court must decline jurisdiction. If according to certain guidelines set forth in the Act, the action is predominantly an intrastate action, the court must also decline jurisdiction. As most of the factors that the court is to analyze in determining whether to exercise jurisdiction are undefined and little guidance is provided for application of these factors, there will likely be early litigation as the courts determine the limits of their discretion.

Removal
In the past, a number of procedural restrictions often prevented the use of the common defense strategy of removal to federal court. The Act has changed three such restrictions, making removal a more viable option.

Prior to the Act’s passage, removal could only take place within one year after the initial commencement of the action. That is, even if a defendant had just been served with a complaint, but service took place after a year had passed from the initial filing, the defendant could not remove the action. This restriction was in addition to the requirement that, during the one year period, a defendant could only remove an action within 30 days of service. All defendants also had to give their consent to remove the action. Finally, a defendant who was a resident of the state in which the action had been initially brought was not permitted to remove the action.

Under the Act all of these restrictions have been removed. While the action still can only be removed within 30 days of service on a defendant, now there is no time restriction on when the action may be removed. Also any defendant can remove the actions regardless of its citizenship or whether other defendants have consented. These changes greatly increase the options for a class action defendant.

A significant change to removal procedure under the Act involves the appeal of a grant or denial of removal. An order granting or denying removal may now be appealed. The appellate court has discretion to accept the appeal or not. The appeal must be filed within seven days of the lower court’s order. If the appellate court accepts the appeal, it must issue a judgment within sixty days or the appeal is denied.

Consumer Class Action Bill of Rights
The Act implements a “Consumer Class Action Bill of Rights” in an attempt to assure fair and prompt recoveries for class members with legitimate claims, another stated purpose of the Act. The Act addresses attorney’s fees awarded in “coupon settlements” where plaintiffs receive coupons for goods, services, or discounts from the defendants. Under the Act, contingent attorney’s fees must be determined by the actual value of the redeemed coupons rather than the total value of the issued coupons, the method previously permitted. If coupons are only a portion of the recovery, any fees for noncoupon relief must be awarded based on the time reasonably spent by the plaintiff’s attorney on the action. Finally, the Act requires that all attorney’s fee awards in a coupon settlement be approved by the court after a hearing. The Act provides for a high level of judicial scrutiny and requires the court to issue a written finding that examines the true value and fairness of the settlement to the class. These restrictions will likely lead to fewer coupon settlements as such settlements will prove economically unattractive to plaintiffs’ attorneys.

The Act also requires that within 10 days of the filing of the proposed settlement in court, the appropriate federal and state officials must be notified. The appropriate federal official is the Attorney General or the person with the primary regulatory or supervisory responsibility over the defendant. The appropriate state official may be the State attorney general, the person with the primary regulatory or supervisory authority over the defendant, or the entity who licenses or authorizes the defendant to conduct business in the State. The Act details a number of items that must be included in this notification. The final approval of the proposed settlement may not be issued by the court earlier than 90 days after the notification of the appropriate federal and state officials. An important consequence of failure to notify the proper official is that class member may refuse to comply with the settlement agreement or may choose to not be bound by the agreement or any consent decree.

Commentators believe the Act will have a chilling effect on the number of class actions brought in state court. Fewer classes will be certified as it is generally accepted that class certification under the federal rules is more stringent than under state court rules. With the greater opportunities for removal and with “minimal diversity” broadening the scope of federal jurisdiction, defense attorneys will be able to avail themselves of the stringent federal rules with greater ease. Defendants and their attorneys should, however, be prepared for litigation related to the procedural nuances of the Act, particularly those related to the discretionary factors to be analyzed by a court in determining whether to exercise jurisdiction. The limits of the court’s discretion will be tested and subject to a period of refinement and clarification. Other aspects will also be litigated in an attempt to determine how the Act affects actual class action practice. Indeed, two Courts of Appeals have already analyzed when actions are deemed to have “commenced” for purposes of the applicability of the Act. See Knudsen v. Liberty Mutual Ins. Co., 2005 U.S. App. LEXIS 10440 (7th Cir. June 7, 2005); Pritchett v. Office Depot, Inc., 404 F.3d 1232 (10th Cir. 2005).

With the consumer protection provisions and the increased availability to federal courts for defendants, the Class Action Fairness Act of 2005 will likely live up to its name and institute a new level of fairness for consumers and defendants involved in class action litigation.